Uncovered Interest Rate Parity and the Term Structure

57 Pages Posted: 6 Feb 2002

See all articles by Geert Bekaert

Geert Bekaert

Columbia Business School - Finance and Economics

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs

Yuhang Xing

Rice University

Multiple version iconThere are 2 versions of this paper

Date Written: January 29, 2002

Abstract

This paper examines uncovered interest rate parity (UIRP) and the expectations hypotheses of the term structure (EHTS) at both short and long horizons. The statistical evidence against UIRP is mixed and is currency - not horizon - dependent. Economically, the deviations from UIRP are less pronounced than previously documented. The evidence against the EHTS is statistically more uniform, but, economically, actual spreads and theoretical spreads (spreads constructed under the null of the EHTS) do not behave very differently, especially at long horizons. Partly because of this, the deviations from the EHTS only play a minor role in explaining deviations from UIRP at long horizons. A random walk model for both exchange rates and interest rates fits the data marginally better than the UIRP-EHTS model.

Keywords: Expectations Hypotheses, Uncovered Interest Rate Parity, Term Structure, Long Horizon Test

JEL Classification: E4, F3, C5

Suggested Citation

Bekaert, Geert and Wei, Min and Xing, Yuhang, Uncovered Interest Rate Parity and the Term Structure (January 29, 2002). Columbia Business School Working Paper; EFA 2002 Berlin Meetings Discussion Paper. Available at SSRN: https://ssrn.com/abstract=298754 or http://dx.doi.org/10.2139/ssrn.298754

Geert Bekaert (Contact Author)

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

Min Wei

Board of Governors of the Federal Reserve - Division of Monetary Affairs ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
488
rank
49,197
Abstract Views
2,535
PlumX Metrics